Britain should bring back war bonds to boost defence

Yahoo

17-02-2025

General Sir Roland Walker, head of the British Army, recently launched a barrage of criticism at investors to 'stop treating defence and energy like porn and gambling'. National security is a 'noble endeavour' not a casual or deliberate ESG [environmental, social and governance] exclusion, he said.
Neither the Prime Minister nor the General can be faulted for the premise or urgency of their calls to safeguard Britain's future. We face the most dangerous threats in a generation – and probably since the 1930s.
The US is no longer primarily focused on Europe's security as in the past. The Trump administration is prioritising US interests, recasting the 75-year-old Nato alliance in the process.
European countries will need to increase their defence budgets and take greater responsibility.
But institutional investors are driven by hard-headed financial principles, albeit they're also inclined to act in the national interest.
Successive governments have failed to provide sufficient clarity and strategic vision for investors to feel confident about allocating more capital to defence. Reform of defence procurement in particular must be a top priority if Sir Keir Starmer wants to change this situation.
Here, the Government is on shaky ground. Defence procurement is notoriously inefficient, with cancellations or project delivery and budget overruns commonplace. Ship and aircraft delivery times are typically measured in decades, and the Commons defence select committee's review of the Army's armoured capability was excoriating.
Proven procurement reform to maximise returns and efficiency and minimise waste is a pre-requisite for enduring investor commitment to long-term defence capital.
It is not lost on the investment community that the 2025 Strategic Defence Review is the 11th since 1990, the sixth in the post-global financial crisis era and conducted by the eighth defence secretary since 2010. Over 15 years, the average duration of strategic thinking has been less than two and a half years.
Another difficulty is that, with defence contracting, the principal customer or licensor holds most, if not all the cards. Central government either commissions and buys the products itself or lays down terms and restrictions on the condition of sale to third parties.
Commercial certainty is never a given (investors understand risk – it is their stock in trade), but the business opportunities only have one source: central government.
If Sir Keir Starmer is serious about investors 'getting behind defence', he must address these problems to make defence a compelling investment proposition as well as one to be undertaken in the national interest. There is a broader macroeconomic angle at play, which will make the support and capital available from investors even more important in future.
In 2022/23, the Ministry of Defence spent £25bn with British defence contractors and suppliers. UK defence exports were £14.5bn, a rise of £4.8bn over 2021/22 because Poland increased defence spending to 4.1pc of GDP.
However, Mark Rutte, the Nato secretary general, and Donald Trump, the US president, have intimated that all Nato members' defence spending must rise from a minimum of 2pc of GDP to 3pc, perhaps more. A quarter of the 32 countries in the alliance are currently deemed non-compliant at under 2pc.
While spending by America, Poland, Estonia, Latvia and Greece already exceeds 3pc of GDP, for many, a potential 50pc uplift in defence spending is not only a considerable stretch but a commitment too far.
Germany and France's governments have both recently been impaled by their own deficits; the US, while compliant, is once again confronting the debt ceiling, nursing a 6.2pc deficit and $36.1 trillion (£28.6 trillion) of borrowings.
The UK is constrained by the Chancellor's self-imposed borrowing limits and potentially faces an emergency spending review in March. Fiscally and financially, governments have their backs to the wall with little room for manoeuvre even when national security is at risk and the demand has gone out for more defence spending.
Investors must take their share of the blame. They have willingly and indulgently financed persistent deficits, underpinned by central bank quantitative easing. It has been as fiscally unsound as it was financially illiterate.
The fiscal laxity undoubtedly contributed to the accumulation of unnecessary frictional costs and waste across the whole economy, including defence procurement.
It argues today for broad but radical public sector reform to tackle deficits and debt. Specifically in defence, such reform would deliver a bigger bang for buck: good for the investor, the taxpayer and national security.
The investment community should take a lead too: offer a hypothecated, fixed duration National Defence Loan (last raised in 1936, and otherwise known as a war bond) but only on condition that a blueprint for procurement reform is produced first, with very clear, measurable key performance indicators (KPIs) and explicit milestone deliveries.
Failure to deliver on KPIs would equate to default and the loan would be called, and those responsible would be held to account. The lure of a large carrot backed up with a big stick could be just what is needed.
If the Prime Minister does his bit, investors will do theirs.
Alastair Irvine is an investment specialist in the Jupiter Independent Funds Team. He is writing in a personal capacity and the views expressed are his own.
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